Mattel needs to make Barbie a success again after flagging sales.
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Mattel has spent the past three years trying to prove that Barbie can provide true girl power but now the company may have to prove that its entire portfolio is worth more than the sum of its parts.
The maker of Barbie, Hot Wheels, Fisher-Price and UNO is facing growing shareholder pressure to consider a sale after a period in which its strategy of turning toy brands into entertainment franchises has delivered some spectacular successes and some increasingly difficult questions.
The latest pressure has come from Ariel Investments, which owns about 5.4% of Mattel. Chairman and Co-CEO John Rogers told the company’s board that Mattel should consider a range of strategic alternatives, including selling significant assets, merging with another company or selling the entire business.
Ariel’s intervention follows an approach from rapidly expanding Authentic Brands Group that could value Mattel at more than $6 billion, with an offer reported at over $20 a share, a substantial premium on Mattel’s roughly $3.6 billion market value before takeover speculation sent the stock higher.
But a sale is far from certain and the more immediate question is what Mattel’s new leadership will do with the company and whether Roger Lynch, the incoming chairman and CEO, can demonstrate that the toy maker is better as an independent company.
Lynch arrives at a difficult moment, succeeding Ynon Kreiz, who spent eight years transforming Mattel around its intellectual property, culminating in the extraordinary success of the 2023 Barbie movie. Kreiz is now moving to Paramount Skydance, where he has become co-CEO alongside David Ellison following its $110 billion acquisition of Warner Bros. Discovery.
Lynch, meanwhile, is coming from Condé Nast, where he spent more than seven years transforming the publisher’s business.
The challenge is that Mattel needs to demonstrate that its brands can generate substantially more value across toys, film, television, gaming, licensing, consumer products and experiences, which was promised Kreiz’s strategy. Yet while Mattel’s second-quarter numbers saw sales up 10% to $1.13 billion, gross margin fell 270 basis points and the company swung to an $18 million net loss from a $53 million profit a year prior.
Mattel Has A Barbie Problem
Barbie remains the biggest problem. Worldwide Barbie gross billings fell 16% in the second quarter, Fisher-Price declined 7%, but Hot Wheels increased 14%.
The interest from Authentic Brands Group is particularly significant because its business model is tailor-made for acquiring consumer brands whose intellectual property is more valuable than their current operating performance suggests.
Authentic owns or controls more than 50 brands, including Reebok, Champion, Guess, Nautica, Brooks Brothers, Forever 21, Dockers and Ted Baker and, in August, completed the acquisition of the Care Bears IP, establishing what it described as a new character-entertainment vertical.
Meantime, investors may increasingly ask whether Mattel should continue operating all of its brands under one corporate roof. UNO and Mattel’s games portfolio offer attractive opportunities in digital and physical entertainment and the company completed the acquisition of the remaining 50% of mobile games studio Mattel163 earlier this year and is developing self-published games.
Mattel also already works with major entertainment companies on brands including Disney Pixar, Microsoft, Warner Bros., NBCUniversal and WWE. Its own portfolio includes Masters of the Universe, MEGA, American Girl, Polly Pocket, Monster High and Thomas & Friends.
Who Could Buy Mattel?
But what has disappeared is investor patience. At the end of June, Mattel had approximately $524 million of cash and $2.33 billion of long-term debt. Trailing 12-month free cash flow was approximately $435 million.
That means a $6 billion equity valuation does not represent the full cost of acquiring the company, because a buyer would need to assume or refinance the debt, while also paying a premium large enough to persuade shareholders to sell.
That also raises the question of who else might bid. Southeastern Asset Management, which owns about 4% of Mattel, pushed in May for the company to explore a sale, including a potential transaction with Hasbro or private equity.
Entertainment companies are arguably the most strategically interesting potential buyers, yet the consolidation already taking place in Hollywood means the appetite and balance sheets of potential media buyers are changing rapidly.
The board could launch a formal strategic review without committing to a sale, enabling it to test the market, understand what buyers are prepared to pay and establish whether the value of the company really is substantially higher under different ownership.
At the same time, Lynch could attempt to demonstrate that Mattel can create that value by fixing the weaker toy businesses, leveraging the strongest brands, accelerating licensing, digital and entertainment and location-based opportunities.
It’s time to find out whether Barbie can still go party.
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